DUMPSTER DIVING

November 20, 2016

A few weeks ago I went dumpster diving. I normally don’t go into the trash, unless the item is anything chocolate and it’s pretty clear there has been no touch-age. Don’t judge me.

The item was a little kid’s rocking chair, and I found it in was a strip mall community dumpster at the back of my favorite lunch place. I have a secret parking space that can fit my pickup and leaves me less than 50 feet from the back door. The dumpster is located next to my space, which is no problem as long as the wind is blowing from the north, or I remember to hold my nose and shut my door quickly.

When hopping out the other day I did the quick glance inside and noticed this little rocker leaning against an old baby bed in the far corner. The wooden chair had a cool horse engraved on the back, and looked to be in perfectly good shape. So I looked both ways, and went for it. No, I didn’t jump all the way in. C’mon folks, get your mind out of the dumpster. I got a good angle, where very few body parts touched, and fished it out.

It was a nice chair. A little soap and water, maybe some degreaser and a tetanus shot, and I had a great chair for all my future grandchildren. So I left it there beside my truck to air out a little while I enjoyed my favorite sandwich.

Yes, I washed my hands before I ate. You guys will never shake my hand again, will you?

When I came back forty minutes later the chair was gone. My beautiful horse engraved grandkids’ rocking chair gone. Stolen. I loved that chair. It felt like a thief had stolen a part of my family.

It’s true that one man’s trash is another man’s treasure. When my old refrigerator bit the dust and was going to cost me $150 to be hauled away, I put it out at my street, and sure enough, the next morning it was gone. I wonder if I could be as lucky if I did that with my wife’s cat?

This same trash and treasure principal works in the stock market. Some of the best stocks to own are oftentimes found in the Wall Street dumpster. You just have to know when and where to look.

There is an investment group that do an organized dumpster dive. On the last day of each year they purchase the three worst performing Dow Jones Industrial stocks that year, and then sell those same stocks on the last day of the following year, repeating the process each year. Their thesis is that the bottom feeding Dow stocks in one year typically outperform the following year. In other words, they dumpster dive. Now I’m not recommending you do the same, but it’s worth a look.

You see folks, stocks go through four emotional phases in a price cycle. These emotional phases are:

Optimism

Euphoria

Hope

Despair

In the optimism phase the news and sentiment is improving, investors begin to like the company and bid up the stock.

In the euphoric phase all the news is fantastic, everyone piles into the company, and the sky seems the limit. During this phase the stock price rises dramatically to a climax, then suddenly reverses and begins to quietly drop, even though the news flow is still positive.

This quickly leads to the hope phase, when the news flow turns negative, and the stock price continues to fall while everyone who piled in during euphoria have their shorts handed to them.

Hope eventually fades to despair as the stock continues to drop and news flow and sentiment goes from bad to worse, until many investors finally give up on the stock, throwing it into the dumpster.

Then after what seems like an eternity, the despair phase turns back into the optimism phase as the news and sentiment begins to get better and investors once again bid up the stock, and once more the cycle begins anew.

It’s the end of the despair phase and just before the start of the optimism phase and a brand new cycle that you should be getting into your diving gear. You’ll notice the opportunity when the news flow is still end-of-world horrific, but the stock price suddenly stops dropping. That’s when you can strap on your hazmat suit, dive in, and snatch some beaten down stocks just as they begin their new cycle.

Take a company like Kinder Morgan for instance. KMI is the largest oil and gas pipeline in the U.S. A year and a half ago it was trading at around a Phase Two euphoric price of $44, but with the slide in oil this past year that price crashed to a Phase Three hope and Phase Four despair low of $11, as Wall Street drug oil and gas to the dumpster. $44 to $11. Ouch.

But early this year something happened. While the news flow continued to cast a serious doubt on the industry (i.e. bankruptcies, layoffs, credit troubles, Keystone, OPEC, Iran, Russia, fracking, earthquakes) Kinder Morgan quietly stopped dripping lower. In fact, it has almost doubled this year even though the news and sentiment is still negative. This isn’t a recommendation to buy Kinder. It’s just one example of what was a dumpster opportunity earlier this year.

How about gold? Euphoria came in 2011, followed by two years of hope, then two years of despair, and now quite possibly the beginning once more of optimism. It was probably at the end of despair when Warren Buffett said gold had no value and should never be owned, yet the price quietly moved up. That was dumpster diving time.

I can give all kinds of examples. In hindsight, it’s easy to spot the end of despair and beginning of optimism. Not when they are being drug out back, when the news flow is just awful, the price of the stock is getting pummeled, and the consensus is the company may never recover. That’s when the gems are hard to see.

The trick of the trade is to remember to put in your ear plugs with your hazmat suit, and simply watch the price of the stock as the crowd throws the stock into the dumpster of despair.

In the aging bull market like we are presently in, the majority of stocks are not in despair. Most have been on an eight year optimism run that seems like it will never end. The past few months have shown some signs that the optimism and euphoric phase may be giving way to hope as some former leading stocks are rolling over. Still, the number of dumpster stocks in the despair phase are few and far between. It just makes you look extra hard, maybe dig a little deeper.

In my search, I’ve found a few stocks lying in the corner of the dumpster. In fact, I’m in one of them right now. I began following it two years ago as it went from euphoria to despair, going from a high of $38 at the peak to a low of $15 at the beginning of this year. I continued watching it as the news kept getting worse, yet it and some of its industry brethren suddenly quit moving lower. Fundamentally, the stock is in the cash rich fertilizer industry that everyone around the world needs in both good times and bad, and it pays a 5% yield. But best of all, early this year its price appeared to have stopped going down. So after nine months of staring at it, a month ago I placed an initial 1/3 position at around $18, and will continue to add over the next few weeks and months as long as the price remains above $15. I’m dumpster diving because I believe the stock is beginning a new cycle. My plan is to ride it higher over the next few years, while getting paid to own it. Then at the first sign of euphoria, when everyone is piling in and the news flow is fantastic, I will look to sell it. Hope is not a profitable word in the stock market, and I’m not partial to despair.

If you are looking for ways to make money, you might give dumpster diving a whirl. Money on Wall Street can be found in some of the strangest and nastiest places. Try heading out back, to the alley, where you just may find your treasure lying at the bottom of a dumpster.